It's fairly obvious that commodity prices are important when evaluating an exploration and production company, and nowhere is the importance more evident than when analyzing the industry's year-end reserve reports.

IN PICTURES: 10 Tips For Choosing An Online Broker

Standardized Measure
The Securities and Exchange Commission (SEC) mandates that exploration and production companies report a metric known as the standardized measure of discounted future net cash flows. This is the present value of the cash flow that a company's proved reserves will generate after taking into account production and development costs and taxes.

Companies also report a non GAAP measure known as the PV-10 value, which represents the net cash flows that these proved reserves will generate, discounted at 10%. A company will typically calculate this measure using the average monthly prices over the preceding year, and will also present an alternative valuation using higher commodity prices.

Denbury Resources (NYSE:DNR) recently reported its proved reserves for 2010 and reported a PV-10 value of $7.3 billion for these reserves using an oil price of $74.36 per barrel and $4.29 per Mcf for natural gas.

The company also reported an alternative value for its proved reserves of $9.4 billion using higher commodity prices based on the futures market. These prices were $87.31 per barrel for oil and $5.46 per Mcf for natural gas.

Denbury Resources went one step further in helping by disclosing the sensitivity of the value of its reserves to various commodity prices. Every one-dollar change in oil prices would result in a $146.5 million change in value. The value would fluctuate by $10.8 million for every ten-cent change in natural gas prices. This sensitivity only applies to small changes in prices because a large change might force the company to recalculate the amount of its proved reserves.

Not all exploration and production companies provide this level of detail. Pioneer Natural Resources (NYSE:PXD) reported proved reserves of 1.011 billion barrels of oil equivalent at the end of 2010. The company reported the PV-10 value of these reserves at $8 billion, and the standardized measure at $5.4 billion.

Unit Corporation (NYSE:UNT) reported proved reserves of 622.2 Bcfe at the end of 2010, and calculated the PV-10 value at $1.3 billion and the standardized measure at $900 million. Concho Resources (NYSE:CXO) reported year-end proved reserves of 323.5 million BOE disclosed a PV-10 value of $6.1 billion.

All of these companies used the lower SEC prices to calculate the PV-10 value and no alternative value using higher commodity prices was disclosed.

The Bottom Line
The exploration and production industry reports the value of its proved reserves using the government mandated commodity pricing, and an alternative value using higher futures prices for oil and natural gas. This makes it easier for investors to see the impact of commodity prices on the value of these reserves. (For additional stock analysis, see Natural Gas Forecast.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Investing

    What’s the Difference Between Duration & Maturity?

    We look at the meaning of two terms that often get confused, duration and maturity, to set the record straight.
  2. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  3. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  4. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  5. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  6. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  7. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  8. Fundamental Analysis

    Buy Penny Stocks Using the Wisdom of Peter Lynch

    Are penny stocks any better than playing penny slots in Vegas? What if you used the fundamental analysis principles of Peter Lynch to pick penny stocks?
  9. Fundamental Analysis

    Are Amazon Profits Here to Stay?

    Amazon is starting to look like a steadily profitable company. Is this really the case? Should investors even be hoping for profitability?
  10. Markets

    Are EM Stocks Finally Emerging?

    Many investors are looking at emerging market (EM) stocks and wonder if it’s time to step back in, while others wonder if we’ll see further declines.
  1. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  2. Can working capital be depreciated?

    Working capital as current assets cannot be depreciated the way long-term, fixed assets are. In accounting, depreciation ... Read Full Answer >>
  3. Do working capital funds expire?

    While working capital funds do not expire, the working capital figure does change over time. This is because it is calculated ... Read Full Answer >>
  4. Do hedge funds invest in commodities?

    There are several hedge funds that invest in commodities. Many hedge funds have broad macroeconomic strategies and invest ... Read Full Answer >>
  5. How much working capital does a small business need?

    The amount of working capital a small business needs to run smoothly depends largely on the type of business, its operating ... Read Full Answer >>
  6. What does high working capital say about a company's financial prospects?

    If a company has high working capital, it has more than enough liquid funds to meet its short-term obligations. Working capital, ... Read Full Answer >>

You May Also Like

Trading Center